The most frustrating part of pricing a product is that there are no right or wrong ways to do it.
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With literally dozens of pricing structures and strategies available to small business owners, it can be difficult to determine which one is capable of firming up your position in the marketplace.
Many small business owners overlook the most important fact about pricing: Pricing is designed to generate profit, not drive sales. Are profit and sales connected? Sure, but instead of keeping their eye on a healthy bottom line, a lot of small business owners set prices that barely cover their costs and drive the business to the brink of bankruptcy.
In addition to your profit margin, here a few other things you'll need to keep an eye on when pricing your products:
- Costs. By far, the simplest and most effective way to reduce your prices is to reduce your costs. In cost-plus pricing, the price of your product is determined by adding cost (including labor and overhead) to your desired profit margin. When it's time to reduce prices, some owners tend to mistakenly reduce their profit margin instead of addressing cost inefficiencies that are running rampant in the business.
- Competitors. In certain industries, competitive pricing is the standard method for determining the price of a product. Small businesses that employ competitive pricing strategies rely almost exclusively on the price points of larger competitors to determine the price of their products. Yet it's important to watch the competition even if your business isn't located in a competitive pricing industry. If the competition suddenly drops their prices it could be an indication that trouble is just around the corner.
- Customers. It's common for small business owners to neglect their customers when pricing their products. But if you don't know your customers, you really can't do justice to pricing. What is your target demographic? Are your customers more sensitive to service or price? How loyal is your customer base? The answers to these questions are not only useful – they're vital to the process of effectively pricing your products.